Q1 2022 Owens & Minor Inc Earnings Call
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Good day, and thank you for standing by welcome to the Owens <unk> minor, it's first quarter 2022 financial results conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you would need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any photo assistance, please press star zero.
I would now like to hand, the conference over to your first speaker today to Alex Jones Director of Investor Relations. Please go ahead.
Thank you Hello, and welcome to the onto minor first quarter 2022 earnings call or comments on the call will be focused on the financial results for the first quarter of 2022 as well as our full year outlook for 2022.
They are included in today's press release.
This release, along with the supplemental slides are posted on the Investor Relations section of our website.
Please note that during this call we will make forward looking statements. The matters addressed in these statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied here today.
Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factors section of our annual report on Form 10-K, and quarterly reports on Form 10-Q.
In our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release and on our annual report on Form 10-K.
Today, I'm joined by Ed <unk>, our President and Chief Executive Officer, and Andy Long, our executive Vice President and Chief Financial Officer, I'll now turn the call over to Ed.
Thank you Alex good afternoon, everyone and thanks for joining us on the call today.
Already three areas. This afternoon my prepared remarks, starting with the strong performance that we delivered in the first quarter of 2022.
This is a result of our great execution and the expected momentum we carried from our record 2021 as previously discussed in our Q4 2021 earnings call.
Secondly, how the Owens <unk> minor differentiated model led to another strong quarter.
And finally, our continued focus on disciplined investing and operational execution to deliver long term profitable growth.
Starting with Q1 2022.
I'm very pleased to report another strong quarter as we saw the momentum from the record setting 2021 carried into the start of the year largely as we hadn't expected.
Revenue was up year over year in both our products and health care services segment, and our patient direct segment.
However, it should be noted that our patient direct segment led the way at over 25% growth.
Driven by Byrom strongest performance in two years once again firearms growth is well ahead of its market.
Now moving on to operating profit.
We knew going into this quarter that we faced unprecedented year over year comps.
But our year over year growth in revenue, our operational execution combined with our unique business model enabled us to deliver over 90 basis points of operating margin expansion sequentially.
From Q4 of 21 to Q1 of 2022.
Now looking ahead at adjusted EBITDA in the first quarter, we delivered over $118 million of adjusted EBITDA, which was nearly 22% higher than Q4 of 2021.
We also saw strong cash flow generating $80 million of cash from operations during the quarter.
And in addition to that we were able to reduce our debt ahead of the <unk> acquisition and.
And finally I'm also pleased with <unk> performance for the quarter, which was right in line with our expectations. All in all we executed very well during the quarter.
The performance in this quarter is another example of our great teammates continuing to leverage the Owens <unk> minor business blueprint to manage through the current macroeconomic environment.
As a reminder, our blueprint starts with our culture that is based on our humble mission to empower our customers to advance health care, along with the guiding principles of our ideal values.
This event combined with both our Owens <unk> minor business system of continuous improvement and our investment strategy that is disciplined and focused on making the right investments to provide for long term profitable growth.
The first quarter of 2022 also marked an important milestone.
With the completion of the acquisition of Apria, the largest acquisition in the company's history.
And we're excited to welcome the <unk> team to Owens <unk> minor.
This acquisition is part of our disciplined investment process and it strengthens our position in the higher growth direct to patient home market.
It fits perfectly with our strategy to expand our customer offering and to diversify our revenue and EBITDA and deliver long term profitable growth.
Our integration activities have been underway and are off to a great start.
The organizations are coming together very nicely.
And with the acquisition of <unk>, we have enhanced our ability to serve the patients through the hospital and into the home.
I will cover this in more detail later in my prepared remarks.
So let me discuss how the Owens <unk> minor differentiated model led to another strong quarter.
As an overview our.
Scalable value chain starts with manufacturing moves to channel access with great supplier partners and serves the patient through the hospital and into the home.
Owens <unk> minor is uniquely positioned vertically integrated healthcare solutions company with the scale.
Shane Yes, it starts with our Americas based manufacturing.
Using our technology, our teammates our factories and our specifications.
We manufacture from raw material all the way to finished goods.
Look we manufacturer the vast majority of our proprietary halyard brand surgical and infection prevention products, including PPE.
We are not a company that sources the majority of our proprietary products from manufacturers.
Let me provide you with an illustrative example of our significant control of the manufacturing process from start all the way to finished.
For this example, I'll use nonwoven spun bound fabric based S and IP products.
It all starts with the production of the fabric in our North Carolina facility with polypropylene supply primarily out of Texas. This fabric is then converted into surgical masks and isolation gowns and 90 fives <unk> surgical gowns rap as well as other asking IP products.
Conversion of this fabric to finished goods has been completed in our facilities in Texas, North Carolina, Mexico and Honduras. These products are then transferred to our centralized distribution centers, which is a much shorter delivery route them products shipped from China.
The takeaway here as demonstrated in this quarter is that this model provides benefit for us and our existing and potential customers due to the continuity of supply increased cost control and flexibility.
Next our products are then move to our distribution channel that provides flexibility based on the right balance between technology and touch and has partnered with some of the best manufacturing supplier partners.
We have invested in technology that improve service and productivity, but does not impact our ability to be flexible and scalable to best serve our customers.
The technology that we have invested in such as voice pick predictive analytics Trane Pic inline technology data analytics and route optimization has enabled us to scale as needed.
Take away here is that the deployment of technology combined with our Owens <unk> minor business system throughout our nationwide distribution system has enabled us to provide 99% plus service levels for on time delivery and shipping accuracy for our customers, while delivering efficiencies and productivity to us.
As demonstrated in this quarter.
And finally, our value chain finishes with our broad based patient direct business to serve the patient from the hospital and into the home.
Our recent acquisition of Appia expands our position in the direct to patient market.
This acquisition expands our patient direct platform for growth with expanded geographic reach and payer relationships.
It creates market expansion through a broadened patient direct portfolio with well positioned complementary product categories.
It generates cross selling opportunities to drive increased revenue with the opportunity to serve treatment of overlapping conditions for patients and product bundling.
And finally this acquisition provides access to approximately 90% of insured healthcare customers in the U S. The.
The takeaway here is that this expansion enhances our ability to serve the patient and one of the fastest growing spaces in health care the home.
And our strength in this market was demonstrated in this quarter with 25% revenue growth.
In addition, this acquisition broadens our product portfolio, serving some of the fastest growing categories like diabetes home respiratory and obstructive sleep apnea, which leads me to the last item long term profitable growth.
So let me start with our patient direct segments. This is the segment with multiple secular tailwind.
A $50 billion market that is highly fragmented growing fast with over 80% recurring revenue.
In addition, this market has strong demographics, such as aging population increased obesity and increased adoption of home health and it's a market where we have been winning consistently since 2017.
As our buyer and business is growing at multiples of the market rates recording organic revenue growth in the high teens on a compounded annual basis.
And we expect the strong double digit growth to continue in the future and as I mentioned earlier patient direct grew at over 25% this quarter, which really supports our expectation for strong growth.
Related to the products in our healthcare services segment.
We expect to continue to expand our diversification of product offering both with existing products into adjacent markets such as retail.
With new products into existing markets, such as new surgical and chemo gloves, and new offerings into new markets, such as clean room apparel and gloves.
Along with the portfolio expansion, we continued to advance our distribution network with new facilities and increased investment in technology to continue to improve our ability to serve our customers.
Next I will cover our revised guidance, but before I do that let me also address the macroeconomic conditions. We are currently dealing with.
Like everyone else, we have concerns about the macroeconomic landscape.
While we remain excited about the future the uncertainty around inflation and interest rates has guided us to remain abundantly cautious related to our bullishness on the year.
What I can point you to is our track record over the past several quarters and how we have taken steps to mitigate inflation as we have offset a significant amount of cost pressure.
We will continue to look for levers to reduce growing inflationary pressures going forward.
But we recognize that some may take more time to show benefits.
What we can control is how effectively we run the business and we certainly intend to continue to execute at a high level.
So now let me move on to guidance for 2022 with Q1 coming in consistent with our internal expectations of a strong start to the year and the expected accretion from <unk> for the remainder of the year. We are revising our adjusted EPS guidance to the range of $3 five.
The $3 55 for the full year of 2022.
Andy will provide more detail later.
Lastly, I am excited that January marked Owens <unk> minor 140th anniversary.
A fantastic accomplishment few companies can boast about.
We have a proud legacy of focusing on our customers our teammates and our communities.
I think all of the past and current teammates for their dedication and look forward to many successful years ahead.
Before I turn the call over to Andy Let me conclude by saying that we will continue to use the Owens <unk> minor business system, and our differentiated business model to deliver another strong year remain on track to achieve our long term goals and minimize the impact of inflation with that I'll turn it over to Ann.
For a discussion of our first quarter financial results Andy.
Thank you Ed and good afternoon, everyone today I'll review, our financial results and key drivers for our performance in the first quarter, and then ill discuss our expectations and assumptions for 2022, which reflects the completion of the <unk> acquisition as well as the current macroeconomic environment.
Our reported first quarter revenue was $2 4 billion.
Compared to $2 3 billion or three 5% growth versus the prior year.
Both segments contributed to the year over year growth with products in health care services growing at one 2% and patient direct growing 25, 7%.
Excluding the impact of the three days of revenue from the <unk> acquisition that patient direct segment grew 27%.
We're looking at the entire quarter I'm very pleased to report that <unk> delivered strong results, including revenue growth of four 6%. Despite a headwind from the Phillips recall.
Turning back to consolidated results sequentially revenue was down two 4% as expected.
Half of this was due to a reduction in glove prices with the balance attributable to seasonality and a slowdown in elective procedures.
PPE volume was up slightly versus Q4, which included a significant increase in 95 revenue. Despite the ending of the government stockpiled program in Q4.
Much of this increase came from international markets, reflecting the traction that we're getting from our efforts to expand in this channel.
From a gross margin perspective, the first quarter came in at 15, 5%.
This was a year over year decline of 350 basis points, which was largely driven by last year's favorable timing of glove costs as well as the impact of inflation net of mitigation efforts in the first quarter of 2022.
On a sequential basis gross margin was 170 basis points higher than in Q4 as gloves cost and prices are now more aligned in Q1 as expected.
Our first quarter distribution, selling and administrative expense was $280 million versus $293 million in the prior year in.
In the first quarter of last year operating expense included a donation to establish the Collins and minor charitable foundation further cementing our commitment to ESG efforts and.
Last year's unprecedented profitability drove incentive based compensation higher.
This favorability was partially offset with the addition of three days of <unk> operating expense coupled with inflationary pressures.
Execution of our Owens <unk> minor business system enabled us to successfully mitigate a large part of these inflationary cost increases.
First quarter interest expense was $12 million or $11 $4 million, excluding the interest expense associated with the financing of <unk>.
This compares to $13 $7 million in the prior year.
The decrease was primarily due to lower interest rates in Q1 of 'twenty, two resulting from our debt refinancing in March of last year.
Our GAAP net income for the quarter was 39 million or <unk> 52, a share.
Adjusted net income in the first quarter was $73 million compared.
Compared to a $111 million last year.
Current quarter adjusted EPS was <unk> 96, compared.
Compared to $1 57 in Q1 of last year as.
As I mentioned earlier, the glove cost dynamic had an outsized impact in Q1 of 'twenty, one skewing year over year comparisons.
The foreign currency impact on adjusted EPS for the first quarter was <unk> <unk> unfavorable compared to last year.
Worth, noting that just two years ago in Q1 of 2020, our adjusted EPS was <unk>.
It reflects the sustainable improvements we've made in the business in just two years.
First quarter, adjusted EBITDA was $118 $5 million with a margin of four 9%.
When compared sequentially to the fourth quarter adjusted EBITDA increased by $21 million with margin, improving 98 basis points, our Owens <unk> minor blueprint and business system. Once again allowed us to mitigate a substantial portion of the accelerating inflationary pressure seen in the quarter.
Before turning to segment results Q1 represents the first quarter of reporting under our new segment structure with.
We've organized our business into two distinct segments to reflect how we go to market, our organizational structure budgeting and financial reporting processes.
These two new segments or products in health care services and patient direct.
Products and health care services provides distribution outsourced logistics and value added services and manufacturers and sources medical surgical products through our production and kitting operations.
Patient direct expands our business along the continuum of care through the delivery of medical supplies and equipment direct to patients and home health agencies largely to address chronic conditions and is the leading provider of these services in the United States.
On a segment basis products and health care services reported first quarter revenue of $2 1 billion up one 2% year over year.
This was a result of market share gains and growth with existing customers, partially offset by lower PPE sales and lower global prices as previously communicated.
Alex and health care services operating income for the quarter was $89 1 million.
Compared to a $150 4 million in the prior year's first quarter.
The decline versus prior year was largely due to the glove cost and price dynamics from Q1 of last year that I described earlier, coupled with higher inflation net of efforts to mitigate its impact as.
As anticipated we saw sequential operating margin expansion of 107 basis points from Q4 of 21 to Q1 of 'twenty two as glove costs and prices are now more aligned in Q1, which will result in a significant reduction in margin variability going forward.
Finally, the year over year foreign currency impact on revenue was unfavorable $8 million and the FX impact on operating income was unfavorable $3 million versus Q1 of last year.
Turning to patient direct our net revenue in the first quarter was $273 million, an increase of 25, 7% year over year.
Excluding <unk> contribution Byron grew 27% their strongest quarter in two years as the business saw volume growth across all major product lines, along with increased price realization.
Operating income for the quarter was $15 8 million compared.
Compared to last year's first quarter of $12 3 million.
Moving now to cash flow the balance sheet and capital structure in the first quarter, we generated $80 million of operating cash flow as a result of strong earnings along with improved working capital.
Net debt was $2 4 billion at the end of the quarter.
On a pro forma basis inclusive of <unk> trailing 12 months of adjusted EBITDA net leverage finished at three seven times.
Going forward, we will continue to prioritize debt reduction and reinvestment at long term growth and expect to return to our target leverage range of two to three times within 18 to 24 months.
In the first quarter free cash flow as defined as adjusted EBITDA less Capex was approximately $100 million and was applied to both debt reduction and reinvestment in the business for future growth.
As Ed mentioned in his remarks with the recent close of the <unk> acquisition, we have updated our guidance for the year and now expect adjusted EPS to be in a range of $3 five to $3 55.
The expected contribution from Apria on our 2022 results is revenue in excess of $900 million.
Approximately $180 million of adjusted EBITDA and <unk> of adjusted EPS.
The 2022 adjusted EPS impact is reflective of <unk> expected adjusted operating earnings initial synergies higher interest expense incremental inflation and preliminary purchase price allocation.
It's worth noting that between the time, we announced the <unk> acquisition to the day, we priced the debt interest rates increased to 150 to 200 basis points.
At the end of the quarter approximately two thirds of our entire debt portfolio was under fixed rates.
Our teams have been working together building synergy growth plans and we remain very excited about the opportunities that have been identified to date.
Over the next three to five years, we expect synergies from the acquisition to generate incremental annual revenue in the range of $80 million to $100 million.
And adjusted annual EBITDA in the range of $40 million to $50 million.
And looking at the total company, we expect revenue for the full year to be in the range of nine 9% to $10 3 billion and adjusted EBITDA in a range of $580 million to $630 million.
<unk> assumptions for 2022 guidance include our gross margin rate of approximately 20% into.
Interest expense in the range of $125 million to $130 million cap.
Capital expenditures of $175 million to $185 million, an increase from previous guidance, which is driven by <unk> growth related expenditures netting to free cash flow of over $400 million Ava.
Available for debt reduction and organic investment.
And adjusted effective tax rate of 24% to 26%.
FX rates as of March 31, 2022, and fully diluted share count of $77 million.
And finally, a few comments about the calendar <unk> of earnings for the remainder of the year coming off a strong Q1, we continue to expect solid performance in each of the next three quarters, but certainly not at the level experienced in the first quarter for many of the reasons at and I have previously discussed.
In particular, we expect the fourth quarter to be the strongest of the three remaining quarters. This year, reflecting a more typical seasonal pattern.
Please be aware that these key modeling assumptions have been summarized on supplemental slides filed with the SEC on form 8-K earlier today and are posted to the Investor Relations section of our website.
In summary, I am very pleased to report another strong quarter, we are executing very well and the outlook for the year as sound as we continue to manage through macroeconomic volatility.
Our cash flow and liquidity are in great shape and will be further strengthened as we continue to integrate <unk> and of course, we're always focused on delivering long term profitable growth.
Before opening the call for questions I want to take a moment to personally welcome our new <unk> teammates to the Owens <unk> minor family.
At this point I will turn the call back over to the operator to begin the Q&A session operator.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your Touchtone telephone towards your question. Please press the pound key please standby, while we compile the Q&A roster.
I show. Our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.
Good afternoon, and thanks for all the color so far.
Andy if I can ask just a little bit about the cadence and thinking about it over the course of the year relative to the <unk> comment being stronger is the implication that <unk> is going to be stronger than what <unk> was and just along those lines. If you think about the cadence what are some of the pushes and pulls that you can expect relative.
The upside downside drivers that you can control.
Versus the macro dynamics of utilization that obviously will remain potentially uncertain.
Sure Mike Good afternoon happy to take that question. So I think it's a great question because cadence of the year is really important.
Let me talk about the general cadence for the year and then let me talk about some of the drivers and then we can discuss controllable versus may.
And maybe market driven so the way I see the year playing out in terms of EPS I do see the first quarter has been the strongest quarter of the year with the 96 tenths of EPS the.
Second strongest quarter of the year I see as the fourth quarter I think we're going to finish the year very strong and I'll describe for you. The reasons for that and then I think Q2 and Q3, the middle quarters I think.
We will be the softer two quarters of the year. So.
It's probably worth talking about some of the key drivers of why whats driving that so starting with kind of why we are seeing the change from Q1 to Q2 and Q3 a couple of drivers. There are first of all let's look at the effective tax rate. So you probably haven't had as you have probably haven't done enough time to look at our financial statements yet, but in Q1, we had.
The adjusted tax rate of 21, 4%, but we've given guidance for the year in that 24 to 26 range. So just the math says that the last three quarters are going to be somewhat higher than 25, 26%. So you've got higher taxes.
We do expect higher interest rate higher interest expense due to higher interest rates right. So we have developed our forecast for interest expense in sync in lockstep with the consensus out there we're aligned with the timing the amount of the fed increases which of course will drive our variable rate debt.
We do expect to see sequential inflationary pressures.
As we move through the year as we talked about in our prepared remarks I'll give one example of that is polypropylene right. That's one of our key raw materials used in manufacturing and while that commodity has eastern price recently.
Its recent highs we are seeing that clients somewhat so that's one of the drivers of inflation.
And an assumption that hasn't changed that's been pretty consistent for a long period of time as we continue to assume that PPE will ease as we move throughout the year.
Again, I'll highlight though.
Q4 to Q1, we did see slightly favorable as a slight increase in PPE in aggregate and in fact that pretty significant increase in 10 90 fives Q4 to Q1. So again the assumption on easing PPE. If that is if it doesn't come to fruition that could be potential upside to our sequential model here.
If you move now to Q4, what are some of the drivers of why we think Q4 is going to be stronger we will exit the year strong.
So we've put in a number of inflation and mitigating actions into place Mike and some of those some of those actions take place and we can get an immediate effect from that but others take a little bit longer to get traction. So you know as you look up look at what can we control what can we control. This with some things that we've put into place, but we will just take some time to see the.
<unk>.
Again, as we pay down debt.
About $400 million of expected free cash flow in the year. So as we start to pay down debt. We do expect to see lower interest expense as we get to the fourth quarter and then maybe some color on the two segments and how we expect them to perform so in the products and healthcare services segment, we do see an acceleration as we end the year. This part of that is just going to be the normal seasonal uptick.
We do see elective procedures potentially getting stronger in the fourth quarter I think that's tied to that seasonal uptick as well and account win implementation right. So we have seen a number of implementations get delayed throughout the year. So we think it's going to be more weighted to the fourth quarter and then just turning to the patient direct segment. We also see that.
Existing the year at a higher pace and keep in mind, Mike that the patient direct segment is now more than just firearms. So this segment now represents 50% of our annualized EBITDA. So this is a big chunk of the business we.
We see seasonal influences here as well that uptick this traditionally driven as people hit their deductibles and they spend more so that's we expect that trend to continue Q4 has the highest level of synergies right. So as we look at the integration of the Africa business, we do see higher synergies in the fourth quarter and then the final factor.
Driving this is it.
Terms of both the sleep and respiratory equipment availability right I think we're all familiar with what's going on with the Philips recall, we do see that situation improving in the fourth quarter and Theres a significant amount of backlog. That's been created from this so we start we're going to start to see that backlog easing and coming down in the fourth quarter and quite frankly, we expected.
Debt to continue strong into 2023.
That's quite helpful. I guess, just one last question relative to <unk>.
Leverage levels, it looks like Youre exiting the quarter I think at three seven times net debt basis anything changed about your target leverage levels.
Until the end of this year, when you're going to get back to I think it was.
Around the two times level that you had previously been targeting.
Yes.
No change in our thoughts on that I think with the strong free cash flow that we think this business is going to deliver over the next several quarters.
We believe we can get back into that target leverage range of two to three times and we can do that in the next 18 to 24 months.
Understood. Thanks, so much.
Thank you.
Our next question comes from the line of a J Rice from Credit Suisse. Please go ahead.
Thanks, Hi, everyone.
You mentioned a couple of times in the prepared remarks accelerating.
Inflation now you clearly.
<unk> been able to offset that with some of the initiatives you called out but I just wanted to make sure I understood.
Where are you seeing in that is that in the patient direct segment or is that across the board and.
And then also specifically in the App.
We hear a lot about the supply demand issues around nursing I know thats not their primary.
Clinician that they're dealing with but what is.
What does the market look like for respiratory therapists and other types of clinicians that they have.
So.
Jay This is Ed I'll take that and thank you for the question.
We're seeing inflation, we're seeing it actually in both sides of our business. So both in patient directives, and our product and health care services segment.
And we're seeing it as general inflation, whether it's inflation related to transportation inflation related to labor.
As well as commodity inflation with really no transportation fuel probably being the bigger of them.
And I think it's important to recognize that.
I think everyone recognizes that the U S. CPI was coming coming in at $8. Six in March was one of the highest we've had in for decades, and it's very different than where we when we set our plan and our guidance for 'twenty three back in May of 2021, but I will tell you what I'm proud about and Andy alluded to some of this and how we offset it is really what we've done to be able to mitigate.
Get that and it's really what makes us different and the fact that we are focused on ways to mitigate it using our Owens <unk> minor business system of continuous improvement everyday finding ways to take out waste and continue to optimize our operations and those are the things we've done really over the last four quarters or so to minimize the impact.
Fact of inflation. The other thing I don't want the group to Miss here is our model is also different and the fact that we have in Americas based manufacturing footprint, where we're making the wrong, we're taking raw material, making the fabric, making the product and frankly, our transportation cost in that business is very different when we're producing product in in North America.
So that's also helped us and saved us tremendous amount. So that's why we see that ability to offset that and the ability to minimize it up to this point in time and frankly I'm excited that the team continues to be laser focused on finding new ways, leveraging our business system and continuous improvement to reduce the impact.
Going forward.
So that's where we are on that.
And then then cross the go ahead.
No that's great.
Say something about the respiratory therapist in the embryo clinicians yeah.
Yes, I'll cover that too, yes, so within it within our patient direct business again, we're not we're not hiring nurses, we do have respiratory therapists.
Our staffing has been a little tighter, but it hasnt impacted our ability to serve our customer base.
So we're still comfortable with where we are with that and Youre right. We have talked to our customers across the board where the.
Clinician.
There are there is tightness in.
And clinicians being able to fill all the open roles that are out there, but from our business from ourselves.
We're in a good position with our respiratory therapists and we're pretty comfortable with where we are.
Okay. Let me just ask maybe one follow up clarification on the guidance to two points I know you said.
And it really elective procedures had ended the quarter at coming back to close to pre pandemic, but slightly below.
And I think Thats, what you've incorporated in your guidance is that solely because of what you saw in January are you now assuming.
That elective procedures are a little lower than you had been assuming previously and I was also going to ask you about the gloves.
I know I think you had that it's about a $235 million revenue item. This year largely no margin associated with it is that been updated is that still your thought I Didnt I don't know you may have mentioned in the prepared remarks, and I missed it but I just wanted to check that.
A J, it's Andy I'm happy to take both of those questions. So.
The first quarter was really an interesting quarter from an elective procedure standpoint from what I thought it was probably one of the more volatile quarters in terms of demand of any of the quarters. We've seen since the pandemic started and we came into the quarter roughly slightly a little bit slow.
<unk> in mid quarter, and we thought at one point in time that the first quarter would actually be sequentially up versus Q4, we thought at one point in time that would actually be higher than pre pandemic levels and then things eased as we moved into March and we actually finished the quarter on electric procedures down sequentially and actually down versus pre pandemic and when we put.
Our original guidance together for the year, we saw that strength in the first quarter at one point in time right and so our calendar <unk> was stronger than the first quarter weaker in the second so that the entire year was flat year over year flat to pre pandemic now with the Miss in the first quarter on the elective procedures, we've chosen to let that missed the split.
That flow through to the year, rather than just stacking it onto the end of the year and making a kind of a go get for us. So the way I look at it is it should elective procedures improve that would be upside to where we are today in terms of our guidance.
Part two of your question on gloves Youre, absolutely right. If you look at the pricing that we experienced in 2021.
We did communicate that our last earnings call that we thought glove pricing would ease between 400 $450 million netting to the number that you referenced.
I would say no major changes in that if anything we might be operating in the lower end of that range.
But that's our current thinking on pricing.
Alright, great. Thanks, a lot.
Thank you.
Our next question comes from question comes from the line of Kevin Caliendo. Please go ahead.
Okay.
Hi, Thanks for taking my call.
A couple of questions. The first one.
And if it did.
Get some.
In the quarter was was there.
Yes.
In particular or are not that high.
It really started to sell through yet.
Yeah, I'll start that and then Andrew can talk about.
There's tremendous amount of feedback right.
Okay.
Is that better.
Yes that is.
So for the quarter for the quarter loan there was slight revenue lift and that's why.
<unk> reported revenue of about 25% growth on the patient direct segment down to over 20% growth when you pull out the three days.
In the quarter, so theres only three days in the quarter.
It had it had very minimal impact overall to the company for the quarter, but let me add on to the question a little bit is so one of the things we talked about was this being a revenue synergy play and that's really how we focus on it.
And we talk about where we think this is going to go longer term with $80 million to $100 million of top line synergies over the next several years from a run rate standpoint, another $40 million to $50 million of EBITDA run rate, but but but here's how what we've done already we've had it for five weeks and we initially thought we would see some of the revenue benefits maybe late in the <unk>.
Fourth quarter, but after only five weeks since we closed on March 29th our commercial teams are already engaged they are already working leads together.
<unk> closed some new business, which to me is extremely encouraging we told you that this was going to happen. It now already the team is starting to deliver on some of the revenue synergies, albeit small, but they are starting to get traction with that already.
The expectation is that continues to ramp as we move through the year Q2, Q3 to Q4 to start to get the revenue ramp going and look at the other part of our DNA as a company is obviously five weeks were and so far we're going to continue to look to find additional ways that we think this can drive value and it's something we're going to.
To do so it had very little impact in Q1 because of only three days.
He was part of it we are as part of our company for three days, but we're already seeing traction on the synergies and the ability to drive revenue growth overall.
Okay. That's helpful.
Two quick follow ups.
With the operating business I know, there's only came out last night, but were you able to review the Fda's communication about the potential there.
But the manufacturers might have to provide some some kind of give back to the to the two <unk> and the other players in the industry reimburse them for lost is that something you've contemplated or have you thought through how that might impact your numbers and do it.
With that recent no we have not.
It was last night, so I assume that.
<unk>.
And then one last one in your 10-K, you had mentioned the <unk>.
Trust renewal was due in April is there any update on that.
Yes, it's been renewed and it's been renewed for four year term.
Any changes to the economics or anything we should note.
No nothing.
No. The answer simple answer is no no changes.
Great. Thank you so much.
Thank you.
Our next question comes from the line of Daniel gross light from Citi. Please go ahead.
Hi, guys. Thanks for taking the question, maybe I'll stick with.
Of that <unk> type of question.
In your core acute distribution business I'm wondering if youre seeing any.
Health systems and hospitals pushback in GPS push back on pricing because if you look at <unk> results for the publicly traded hospitals, they've all been really impacted by higher labor expenses. So I'm curious if they've started to push on pricing negotiations with you to try to offset some of that higher labor expense.
They are all experienced.
What we've seen is really let's call. It a more of a balanced approach they recognize that continuity of supply is important they recognize that.
That's a component of price.
Think our transparency has been has been well received and the fact that where we've had price increases we've been open and transparent on why frac.
Frankly, we minimize those as much as we possibly could.
I would tell you that also see some hospital networks willing to think differently about operations on how we serve so that way it can drive efficiency for them efficiency for us and we both win.
And then the same sense, though there is also the normal process of wanting to continue to find more and more value and there's different ways, where we can help them with it with that so specifically.
Specifically related to wage increases and other inflationary.
Coming back to a specific land that I havent seen that specific ASP, but again, it's really been focused on the value that we can provide.
Got it makes sense I don't know longer term question for you just on the Byrom business ex <unk>. So just looking at Byrom. If we go back to your Investor Day last year.
Did you expect that business to grow to around $1 4 billion by 2026, which would imply around an 8% CAGR from 2021.
It's a step down from the 32% growth you experienced from 2017 to 2021, obviously, you're growing off of a larger base now, but it's it's a pretty steep step down and also if you look at the growth this quarter ex App. That's three days at 20% you mentioned still a pretty big step down curious are there any updates on how you're thinking about the longer term.
<unk> growth of Byrom business.
If theres any temporary tailwind specifically that you don't anticipate repeating longer term.
And so typically with a buyer in business, obviously, when we get to Investor day. This share will revise guidance.
There is no individual tailwind that I can point to on that and third is our expectations for that Byron business is to continue to perform at a very high level, but we will give final numbers when we get to Investor day and update that the long term 2026, but look there performed and they performed extremely well last year.
They are performing extremely well right now in.
And our expectation as a business is that you don't take your foot off the gas. He continued to accelerate and you continue to do what we can to drive again back to our freight for long term profitable growth, which is really what our ambition is.
Got it.
Forward to that thank you.
Thank you.
Our next question comes from the line of Eric Coldwell from Baird. Please go ahead.
Thank you very much and.
Congrats on putting up good numbers here, despite the macro headwinds.
The first topic, you've addressed it in a couple of different ways I wanted to be a bit more specific you talked on the call prepared remarks about.
Your appreciation for the macro environment driving you to maintain what you view as a quote abundantly cautious guidance outlook, even though you've maintained the core.
I know electives you did not.
I guess anticipate a catch up on the lower activity in Q1, it sounds like one of the areas you've stayed cautious but I was hoping you could identify other areas, where you've potentially erred on the side of caution when thinking about the.
The range for the year.
Yeah. So so.
Obviously, we've talked about inflation, there as we've talked about elective procedures.
We have a tremendous I'll add a couple of other ones. One is we have tremendous amount of wins last year and we've implemented customers as fastest 45 days and at times. It takes six to nine months.
With some of the global supply chain issues.
Implementations are going a little bit slower to make sure we don't Miss messed up because of global supply chain issues are products that are that are being that of leading brand products that may be manufactured offshore. So we're a little cautious there.
And then really you talk about some of the global supply chain pressures. That's the other one where it's not impacting our our manufacturing model, but it does have an industry wide impact.
And last thing I would that would explain on this one Eric as you know.
Uninflated and I want to be clear on this absent of inflation.
Would have raised our guidance, but because of where that is and being cautious. That's the one that was one of the factors, but again that didn't exist to the rate. It is the accelerating rate, it's going to where it's at we would have raised guidance.
Okay.
Okay. Thank you for that and I guess I'm more of a glass half full guy when thinking about your results but.
<unk>.
The second topic is on Africa.
Talked a little bit about the performance they've had.
And how the integration has started off well I'm curious if you could give us a sense on what youre expecting <unk> to grow.
For the remainder of the year, both with and without the CPAP headwinds obviously that's a.
Sleep and respiratory therapies that headwind for anybody in the market in the in the in the short term, but I'm curious what you see their growth rates looking like with them without those headwinds.
Yes, Eric Good afternoon, it's Andy are happy to answer that question. So yes, there's certainly been a lot of discussion on the impact that that's had on the <unk> business that we've had with the management team.
And certainly even some of that information just coming out very recently as recent as last week, but overall I think the applegate team has done a fantastic job of navigating this very difficult situation I think they have been in.
Constant communication with the equipment manufacturers, so I think they've been looped in and.
Up to date on all the latest I think the team's done a really nice job of looking for alternate sources of equipments. They purchased equipment, where it is possible to reduce the impact so I think they're doing all the right things.
Probably the only other thing I'll add is that.
Up to and including the information that was released last week by one of the equipment manufacturers our guidance for the year, our expectation for <unk> growth of $900 million in excess of $900 million of revenue over the course of the last nine months of this year reflects that reflects that impact certainly if the.
<unk> of equipments can exceed their timelines that would certainly provide upside to our forecast.
Andy you may not be able to share this or want to share. The site clearly we can take the $900 million plus and compare it to the past I'm just curious what that 900 plus might have been apps.
Absent the incremental prolonged.
Reduction in revenue potential from CPAP I E. If growth was is going to be X. It might've been X plus 3%, 5% some higher number in.
In a normal manufacturing and supply chain environment, just to give us a sense on what kind of a recovery we might see.
Moving into 'twenty, three and beyond.
Yes, I mean, I think as I look at that I think the $900 million is a very balanced figure.
And I think that is our stake in the ground at this point in time and going forward I think if that.
Schedules change if remediation plans change I think we'll be happy to plus minus off of that and share the impact that this will have but right now I think $900 million is a fair and balanced the rest of the year forecast that reflects all the information that we know up to this point in time.
Okay.
Thank you.
Thank you.
As a reminder to ask a question you may do so by pressing star one on your telephone.
I show. Our next question comes from the line of Michael <unk> from J P. Morgan. Please go ahead.
Good afternoon, and thanks for taking the questions.
I was just wondering if you could talk about the new business pipeline in the acute care distribution business.
Is there any way to quantify the size of that pipeline, maybe relative to where we were at this point a year ago.
What are customers prospective customers focused on most and have you seen any change in the competitive dynamics on that side of the business.
Yeah. So let me start work it backwards so.
Dynamics, we're seeing consistent it's really consistent with what we've seen over the last several quarters from a competitive dynamic standpoint.
I talked a little about this last quarter is that we continue to have a really robust pipeline. The pipeline right now is as strong as it's ever been.
This quarter alone from a revenue recognized revenue realized revenue. We felt we saw what I would say is pretty good growth related to wins and implementations of wins that we had last year.
We will continue to look at whether it's renewables or business.
What we look at is we want to drive long term profitable growth. So we've <unk> our customers, we know by product by SKU as well as by delivery route how we can maximize our operations, which also should benefit the customer.
And again, we'll continue to look at our business that way, but.
High level pipeline is still strong we've got a focus on business development.
The quarter from a recognized revenue of realized revenue. We show we should show we showed growth again, both gross and net which is really helping pay where we want to go into the future.
Got it that's helpful. And then just wanted to drill down a little bit more on gloves in the past you've talked about a new facility. That's coming online can you talk about sort of when that is expected to be fully up and running and then once it is how much of your production will be coming from your own facilities versus third party manufacturers and then maybe just to level set are you able to quantify.
Define how much of your business comes from the sale of clubs versus sort of other segments of the PPE market.
Yes so.
The glove manufacturing facility our expansion in our facility, it's producing gloves.
Told everyone it'd be producing gloves, this first quarter and we're delivering on that promise.
In addition to that we would expect it to ramp over the next three quarters, meaning that the lines are and youre not going to get fully optimized lines on day, one and it's going to slowly tweak those going forward.
We're going to add close to 1 billion and a half the units of gloves coming off of those lines and it can be varying from a simple exam glove all the way to a chemo or surgical glove be able to do bolt simple as well as complex clubs within those production lines.
Right now we're at call it 40% to 50% and this is going to add another 10% to 15% of capacity there. So north of 50% of what we sell will be our own products that could be as high as 60. In addition to that share we're continuing to look at other partnerships and opportunities to expand our capability and gloves.
So that's where we are in that and I've said this many times, it's rare in your career and you get an opportunity that you can add capital our spend capital for expansion and know that either you could you could produce more technical products offer there that have a different margin profile or a favorable margin profile. Our worst case scenario you can in source product.
Youre outsourcing, which also provides margin expansion and then lastly by adding that capacity theres additional fixed cost overhead absorption there that takes our P. It can eventually will once it up full and running running at full speed excuse me, we'll be able to take the piece price down.
Got it I appreciate the comments.
Thank you.
I'm showing no further questions in the queue at this time I would like to turn the call over to <unk>, President and CEO for closing remarks.
Thank you so first I am extremely pleased with the quarter.
It really is a continuation of the found eight fundamental changes that we've made in the business over the last three years. If you think about some of those changes many of those actions that we've taken to help mitigate various pressures in the market.
Really been focusing on improving our efficiency and productivity of these businesses. What's important about that is that these benefits will far last into the future and I truly believe they will come.
I truly believe that over time will come out of this cycle. We're in today and we're going to come out of this cycle stronger than what we entered it.
Intimately, we're going to continue to use the Owens <unk> minor business system, and our differentiated business model to deliver another strong year and to remain on track to achieve our long term goals and really to minimize the impact of the environment. We're in today that being the macroeconomic concerns that are out there. Thank you everyone and look forward to talking to everyone again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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